Question - Top management of the Pearl Corp. is trying to construct a performance evaluation system to use to evaluate each of its three divisions. Financial data are as follows:
Division A Division B Division C
Total assets $830,000 $10,700,000 $6,375,000
Noninterest-bearing current liabilities 30,000 1,250,000 500,000
NOPAT 102,000 950,000 780,000
Tax rate 40% 40% 40%
Required rate of return 9% 12% 15%
How would the divisions be ranked (from best to worst performance) if the evaluation were based on net income compared to return on investment? Is management more likely to over or under invest under each of these?